Taxation rules promoting cash dividend passed with modifications
The National Parliament passed the Finance Bill for FY2019-20 on 29 June 2019 with a few modifications, including the proposed policy for taxation of retained earnings. The proposed budget had imposed a 15% tax on stock dividends, and 15% additional tax on retained earnings and reserves in excess of 50% of the paid-up capital of a company. This has now been modified in the following ways:
- In any income year, a company can transfer a maximum 70% of NPAT to retained earnings and reserves without paying any tax penalty. In such a case, the remaining 30% (of NPAT) is to be declared as a cash dividend and/or stock dividend. If the transfer amount exceeds 70% of NPAT, the company will be subject to a 10% tax on the total amount transferred to retained earnings and reserves.
- The regulation also suggests that the amount declared as cash dividend has to be at least equal to that of the stock dividend to avoid a tax penalty. If the amount declared as a stock dividend is greater than that of the cash dividend, the stock dividend will be subject to a 10% tax.
These two clauses together imply that the dividend payout (cash) of a company has to be at least 15% in any income year. We consider this to be a positive move for the Bangladesh stock market. It will increase the overall dividend yield of the market from its current level of 3.6%. Note that out of 310 companies, only 179 companies declared a cash dividend in 2018 and we expect that number to increase significantly.
In addition, the proposed increase in tax-free limit for a cash dividend (from BDT25,000 to BDT50,000) has been approved without any modification.